UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended June 30, 2004

Commission File Number: 0-26802

CheckFree Corporation

4411 East Jones Bridge Road
Norcross, Georgia 30092
(Address of principal executive offices,
including zip code)

(678) 375-3000
(Registrant’s telephone number,
including area code)

     Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.  Yes  þ     No  o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  þ     No  o

     The aggregate market value of our Common Stock held by our non-affiliates was approximately $2,304,874,304 on December 31, 2003.

     There were 90,437,646 shares of our Common Stock outstanding on August 19, 2004.

Documents Incorporated By Reference

     Portions of our Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Part III.

This page intentionally left blank.

-2-

Table of Contents

-3-

Part I

Item 1. Business.

     All references to “we,” “us,” “our,” “CheckFree” or the “Company” in this Annual Report on Form 10-K mean CheckFree Corporation and all entities owned or controlled by CheckFree Corporation, except where it is made clear that the term only means the parent company.

Overview

     CheckFree was founded in 1981 as an electronic payment processing company and has become a leading provider of financial electronic commerce products and services. Our current business was developed through the expansion of our core electronic payments business and the acquisition of companies operating in similar or complementary businesses.

     Through our Electronic Commerce Division, we enable consumers to receive and pay bills. For the year ended June 30, 2004, we processed approximately 583 million transactions, and delivered approximately 82 million e-bills. For the quarter ended June 30, 2004, we processed nearly 163 million transactions and delivered approximately 26 million e-bills. The number of transactions we process each year continues to grow. For the year ended June 30, 2004, growth in the number of transactions exceeded 34%. The Electronic Commerce Division accounts for approximately 75% of our annual revenue. On June 22, 2004, we acquired American Payment Systems, Inc. (“APS”), a leading provider of walk-in bill payment services to consumers. As part of the Electronic Commerce Division, APS enables us to reach consumers we had not previously serviced and to provide an additional service to billers.

     Through our Investment Services Division, we provide a range of portfolio management services to financial institutions, including broker dealers, money managers and investment advisors. As of June 30, 2004, our clients used the CheckFree APL portfolio accounting system to manage nearly 1.6 million portfolios, totaling more than $900 billion in assets. The Investment Services Division accounts for approximately 14% of our annual revenue.

     Through our Software Division, we deliver software, maintenance, support and professional services to large financial service providers and other companies across a range of industries. Our Software Division is comprised of three units, each with its own distinct set of software products. The ACH Solutions unit provides software and services that are used to process more than two-thirds of the nation’s nine billion Automated Clearing House (“ACH”) payments. The CheckFree Financial and Compliance Solutions (“CFACS”) unit enables organizations to manage their reconciliation and compliance requirements. On November 1, 2003, we acquired HelioGraph, Ltd., a United Kingdom-based company that brings a financial transactions management solution with straight through processing expertise to us and expands our international presence. The i-Solutions unit provides software and services that enable end-to-end electronic billing and electronic statement creation, delivery and payment. The Software Division accounts for approximately 11% of our annual revenue.

     We own many trademarks and service marks. This Annual Report on Form 10-K contains trade dress, trade names and trademarks of other companies. Use or display of other parties’ trademarks, trade dress or trade names is not intended to, and does not, imply a relationship with the trademark or trade dress owner.

Electronic Commerce Division

     Introduction. The Electronic Commerce Division enables consumers to receive and pay bills electronically. Its products enable consumers to:

-4-

     Consumers using our services access CheckFree’s system primarily through Consumer Service Providers (“CSPs”). CSPs are organizations, such as banks, brokerage firms, Internet portals and content sites, Internet-based banks, Internet financial sites, and personal financial management software providers, that use our products to enable consumers to receive and/or pay bills electronically. We have relationships with hundreds of CSPs. Some of our largest CSPs, as determined by type of CSP and number of consumers using our products, are Bank of America, Charles Schwab & Co., Navy Federal Credit Union, MSN, PNC Bank, SunTrust Banks, Wachovia Bank, Washington Mutual, Inc. and U.S. Bank. This list of our CSPs is not exhaustive and does not fully represent our customer base. Consumers can also access our system through CheckFree hosted biller direct sites or through www.mycheckfree.com, an educational website where consumers can go to learn about and experience electronic billing.

     Industry Background. In 2003, 16.4 billion consumer bills were sent and 9.4% of those were delivered online, according to TowerGroup. On average, the cost to a biller of submitting a paper bill, including printing, postage and billing inserts, is $1.10 per bill (according to a Gartner study). In contrast, according to the same study, electronic bills reduce that cost by over half. Today, approximately 55% of major billers present electronic bills in one fashion or another, and an additional 30% of major billers have firm plans to do so, according to Gartner.

     In a 2001 study, the Federal Reserve estimated that 42.5 billion checks were written in the United States in 2000, down from about 50 billion in 1995. The use of checks for bill payment imposes significant costs on financial services organizations, businesses and their customers. These costs include the writing, mailing, recording and manual processing of checks. The majority of today’s consumer bill payments are completed using traditional paper-based methods. According to a March 2002 TowerGroup study of United States consumer bill payment methods, of the estimated 20.6 billion consumer bill payments forecasted for 2003, 72.1% were paid by paper check, 16% were paid by electronic means and the remainder were paid by other means (cash, payroll deduction, money order, etc.). By comparison, in 2002, consumers used checks to pay 73.6% of bills, and paid electronically 14.2% of the time. Many financial services organizations and businesses have invested in the infrastructure for recording, reporting and executing electronic transactions. We believe the broad impact of the Internet, the relatively high cost of producing, printing and mailing a paper bill and the cost to financial services organizations, businesses and customers of processing paper checks will continue the trend toward increased usage of electronic methods to execute financial transactions.

     Products and Services. We provide a variety of products that allow consumers to receive and pay bills. CSPs can offer our services to customers either through a hosted application, known as CheckFree Web^SM, or through various protocols that link online banking applications to our Genesis billing and payment engine. Through our CSPs, we support both Microsoft’s Money and Quicken® for electronic bill payment. In addition, we offer a small business-based version of CheckFree Web optimized for business users, CheckFree Web for Small Business^SM. All products feature the ability to “pay anyone, anytime, anywhere” and the ability to receive hundreds of different bills electronically. The next generation of CheckFree Web was released in August 2004 and further advances the capabilities available to consumers, including same day and next day payments, and substantial ease-of-use improvements.

-5-

     Usage Metrics. We report usage metrics in several ways. We report global numbers showing the total number of transactions. For the year ended June 30, 2004, we processed more than 583 million transactions and delivered about 82 million e-bills, which represented growth in transactions of over 34% for the year. We also report usage based on the relationship we have with the CSP, either a “Full Service” relationship or a “Payment Services” relationship. A Full Service relationship is one with a CSP that outsources the complete electronic billing and payment process to us. A Payment Services relationship is one with a CSP that utilizes only a subset of our electronic billing and payment services or uses one of our other Electronic Commerce Division products. Using these metrics, for the year ended June 30, 2004, we processed approximately 440 million transactions related to Full Service consumers and approximately 143 million transactions in the Payment Services category.

     The CheckFree Advantage. We have developed numerous systems and programs to enhance our billing and payment products.

-6-

     Our Business Strategy. Our business strategy is to provide an expanding range of convenient, secure and cost-effective electronic commerce services and related products to financial services organizations, Internet-based information sites, businesses that generate recurring bills and statements, and their customers. We have designed our services and products to take advantage of opportunities we perceive in light of current trends and our fundamental strategy. The key elements of our business strategy are to:

We believe this flexibility equips our CSPs and billers to provide consumers with services that will meet their needs, and that this flexibility makes it more attractive for CSPs and billers to promote our electronic billing and payment service.

-7-

     Technology, Research and Development. Our core technology capabilities were developed to handle settlement services, merchant database services and online inquiry services on a traditional mainframe system with direct communications to businesses. We have implemented a logical, nationwide “n-tier” internetworking infrastructure, which networks together any number of other networks, passing transaction data among them. For example, we internetwork together networks of billers, consumers, CSPs, retail agents and financial institutions to complete electronic billing and payment transactions. Consumers, businesses and financial services organizations access our electronic billing and payment transaction internetworking infrastructure through the Internet, dial-up telephone lines, privately leased lines or various types of communications networks. Our computing complex in Norcross, Georgia, houses a wide variety of application servers that capture transactions and route them to our back-end banking, billing and payment applications for processing. The back-end applications are run on IBM mainframes, Intel platforms or Unix servers. We have developed databases and information files that allow accurate editing and initiation of payments to billers. These databases have been constructed over the past 23 years as a result of our transaction processing experience.

     As part of our disaster recovery systems, we utilize IBM Business Recovery Services and EMC’s remote disk mirroring technology. Using this system, we are able to recover technical infrastructure, client communications, in-flight payments and first-tier customer care within 24 hours.

     We maintain a research and development group with a long-term perspective of planning and developing new services and related products for the electronic commerce and financial application software markets. Additionally, we use independent third party software development contractors as needed.

     Sales, Marketing and Distribution. Our marketing and distribution strategy has been to create and maintain distribution alliances that maximize access to potential customers for our services. We do not, for the most part, market to, or have a direct relationship with, consumers or end-users of our products and services. We believe that these alliances enable us to offer services and related products to a larger customer base than can be reached through stand-alone marketing efforts. We seek distribution alliances with companies who have maximum penetration and leading reputations for quality with our target customers. These alliances include our relationship with CSPs; with billers; with Biller Service Providers (or BSPs) such as Kubra Data Transfer, Ltd., and CSG Systems, Inc.; and with value-added resellers such as Fiserv, FundsXpress, Digital Insight, PSCU Financial Services and S1 Corporation. This list of BSPs and resellers is not exhaustive and does not fully represent our customer base.

     In order to foster a better understanding of the needs of our CSPs, billers, BSPs and resellers, we employ a number of relationship managers assigned to each of these specific customers. We also employ marketing personnel to facilitate joint consumer acquisition programs with each of these customer groups, and to share industry knowledge and previously developed campaigns with their marketing departments. Our alliance partners market our services in numerous ways, including television, radio and print advertising, in some cases offering bill payment services for free.

     Competition. We face significant competition for all of our products. Our primary competition is the continuance of traditional paper-based methods for receiving and paying bills, both on the part of consumers and billers. In addition, the possibility of billers and CSPs using internal development and management resources to create in-house systems to handle electronic billing and payment remains a competitive threat.

-8-

     Metavante, a division of Marshall and Ilsley Corporation, competes with us most directly from the perspective of providing pay anyone solutions to financial services organizations. Since 2001, Metavante has either purchased or announced the purchase of four companies associated with some aspect of electronic billing or payment: Cyberbills, Derivion, Paytrust and Spectrum. A number of other companies compete with us by providing some, but not all, of the services that make up our complete e-bill and electronic pay anyone service. For example, MasterCard International provides a service which allows electronic payment to certain merchants.

     Western Union, a division of First Data Corporation (“FDC”), and Viad compete with our walk-in bill payment services. Each has a national network of retail and agent locations. We also compete with smaller walk-in bill payment providers in different regions of the United States and with billers who have created in-house systems to handle walk-in bill payments.

     Other Products and Services. In addition to the electronic billing and payment service products, the Electronic Commerce Division also offers a credit card account balance transfer product, a credit card refund balance product, an automated recurring payments and software service, which is primarily installed at health clubs throughout the United States, and other forms of wholesale and retail payment solutions.

     Acquisitions. Our current business was developed through expansion of our core Electronic Commerce business and the acquisition of companies operating in similar or complementary businesses. Our major acquisitions related to the Electronic Commerce Division include Servantis Systems Holdings, Inc. in February 1996, Intuit Services Corporation in January 1997, and MSFDC, L.L.C. (“TransPoint”) in September 2000. In October 2000, we completed a strategic agreement with Bank of America, under which we acquired certain of Bank of America’s electronic billing and payment assets. In June 2004, we acquired APS.

Investment Services Division

     Introduction. The Investment Services Division provides a range of portfolio management services to help more than 275 financial institutions, including broker dealers, money managers and investment advisors, deliver portfolio management, performance measurement and reporting services to their clients, primarily for processing separately managed accounts (“SMA” or “SMAs”).

     Our client base includes investment advisors, brokerage firms, banks and insurance companies. Our fee-based money manager clients are typically sponsors or managers of “wrap,” or SMAs, money management products, or institutional money managers, managing investments of institutions and high net worth individuals. We also support a growing number of third party vendors providing turnkey solutions.

     Investment Services’ primary product is a real-time portfolio management system called CheckFree APL, which is used by 40 of the top 50 brokers in the United States and 36 of the top 40 money managers. As of June 30, 2004, our clients used the CheckFree APL^SM portfolio accounting system to manage nearly 1.6 million portfolios representing more than $900 billion in assets.

     Industry Background. Industry analysts (including Cerulli Associates and Financial Research Corporation (2003)) predict a compound annual growth in the SMA business to exceed 20% over the next several years. This projected growth is due primarily to the marketing of fee-based services, like SMAs by brokerage companies, and consumers’ desire to more efficiently manage the tax implications of their investments by leveraging SMAs.

-9-

     Products and Services. Our portfolio management products and services provide the following functions:

     In fiscal 2003, we enhanced our CheckFree APL product by creating a Multiple Strategy Portfolio (“MSP”) solution. This solution allows our clients to track, on a combined basis, the portfolios of their customers, even when multiple portfolios are managed by different asset managers. We currently have 21 clients using this solution and over 30,000 accounts under management.

     Revenues in our portfolio management services are generated per portfolio under management through multiple year agreements that provide for monthly revenue on a volume basis. Revenue from our information services and software is typically generated through multi-year or annual agreements.

     Technology. Our Investment Services Division utilizes IBM technology to run the portfolio management software on a Unix platform. Services are provided primarily as a service bureau offering with the data center residing in Chicago, Illinois and four concentration hub sites located in Jersey City, Newark, Boston and San Diego. In addition to the dedicated private network, clients use frame relay services from several companies to access services. We plan to introduce a new technology platform to replace our existing platform over the next few years that will include enhanced functionality and further drive reductions in processing costs.

     Sales, Marketing and Distribution. We market CheckFree APL through our direct sales force. We generate new customers through direct solicitation, user groups and advertisements. We also participate in trade shows and sponsor industry seminars for distribution alliances.

     Competition. Investment Services competes with potential customers building their own internal portfolio accounting systems. We also compete with providers of portfolio accounting software and services like Advent Software, DST, Vestmark, and IDS, and service bureau providers like SunGard Portfolio Solutions and Financial Models Company.

     Other Products and Services. In addition to our APL portfolio management products, the Investment Services Division also offers proposal generation, investment performance, and reporting products and services. Marketed under M-Pact, M-Search® and M-Watch®, these products manage data for 1,300 managers and 5,600 investment products.

     Acquisitions. Our current business was developed through the acquisition of Security APL, Inc. in May 1996, and Möbius Group, Inc. in March 1999.

-10-

Software Division

     The Software Division operates three units, each of which delivers software, maintenance, support and professional services. These units are ACH Solutions, CFACS, and i-Solutions.

-11-

     Licenses. We generally grant non-exclusive, non-transferable perpetual licenses to use our application software at a single site. Our standard license agreements contain provisions designed to prevent disclosure and unauthorized use of our software. License fees vary according to a number of factors, including the types and levels of services we provide. Multiple site licenses are available for an additional fee. In our license agreements, we generally warrant that our products will function in accordance with the specifications set forth in our product documentation. License fees are generally due upon software delivery to the customer.

     Maintenance and Support. Maintenance includes enhancements to our software. Customers who obtain maintenance generally retain maintenance service from year to year. To complement customer support, we frequently participate in user groups with our customers. These groups exchange ideas and techniques for using our products and provide a forum for customers to make suggestions for product acquisition, development and enhancement.

     Professional Services. We offer implementation services building customer applications around our products.

     Sales, Marketing and Distribution. We market software products through our direct and indirect sales force. Salespersons have specific product responsibility and receive support from technical personnel as needed. We generate new customers through direct solicitations, user groups, advertisements, direct mail campaigns and strategic alliances. We also participate in trade shows and sponsor industry technology seminars for prospective customers. Existing customers are often candidates for sales of additional products or for enhancements to products they have already purchased. We also market through resellers for certain geographies and vertical markets.

     Competition. The computer application software industry is highly competitive. We believe that there is at least one direct competitor for most of our software products, but no competitor competes with us in all of our software product areas.

     In the electronic statement creation and financial applications software markets, we compete directly or indirectly with a number of firms, including large diversified computer software service companies and independent suppliers of software products. CheckFree i-Solutions’ electronic statement and billing creation software products compete primarily with edocs, Inc., Avolent Software and with billers building their own solutions rather than buying software or outsourcing the service. The RECON-Plus products compete with Accurate and SmartStream. Our PEP+ products compete with Transaction Systems Architects, Inc.

     Acquisitions. Our current business was developed through the acquisition of Servantis Systems Holdings, Inc. in February 1996, BlueGill Technologies, Inc. in April 2000 and HelioGraph, Ltd. in November 2003.

     For further financial information about our segments, revenue derived from foreign sales and geographic locations of our long-lived assets, please see Note 20 to Consolidated Financial Statements.

Government Regulation

     We believe that we are not required to be licensed by the Office of the Comptroller of the Currency, the Federal Reserve Board, or other federal or state agencies that regulate or monitor banks or other types of providers of electronic commerce services. The Federal Financial Institutions Examination Council (“FFIEC”), however, periodically audits us, because we are a supplier of products and services to financial services organizations. The FFIEC is made up of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. In addition, because we use the ACH to process many of our transactions, we are subject to the rules of the Federal Reserve Board, which currently allow us to use the ACH by using a routing number assigned to a bank.

-12-

     In conducting our business, however, we are subject to various laws and regulations relating to the electronic movement of money. In 2001, the USA Patriot Act amended the Bank Secrecy Act (“BSA”) to expand the definition of money services businesses so that it may include businesses such as CheckFree. Several states have also passed legislation regulating or licensing check sellers, money transmitters or service providers to banks, and we have registered under this legislation in specific instances. In addition, as are all U.S. citizens, we are subject to the regulations of the Office of Foreign Assets Control targeted at money laundering. Further, we are a “financial institution” within the meaning of the Gramm-Leach-Bliley Act, which governs notice to consumers about the financial institution’s policies with respect to use of customer data and restricts certain use and disclosure of customer data. Finally, we are also subject to the electronic funds transfer rules embodied in Regulation E, promulgated by the Federal Reserve Board. The Federal Reserve’s Regulation E implements the Electronic Fund Transfer Act, which was enacted in 1978. Regulation E protects consumers engaging in electronic transfers, and sets forth the basic rights, liabilities, and responsibilities of consumers who use electronic money transfer services and of financial services organizations that offer these services.

     Our walk-in bill payment service conducted through APS is considered a money services business and as such is registered with the Financial Crimes Enforcement Network. In consideration of certain risks posed, the nature of the products and services, the customer base served and the size of APS’ operations, we have established and we maintain a program to provide a system of controls and procedures reasonably designed to detect, prevent and report actual or suspected violations of the BSA, money laundering statutes, anti-terrorism statutes and other illicit activity while assuring daily adherence to the BSA. In addition, APS currently maintains 35 state licenses to comply with various state legislation regulating money transmitters and is subject to annual audits by those states.

Intellectual Property Rights

     We regard our financial transaction services and related products as proprietary and rely on a combination of patent, copyright, trademark and trade secret laws, employee and third party nondisclosure agreements, and other intellectual property protection methods to protect our services and related products. We have been issued 23 patents in the United States and abroad. The majority of these patents cover various facets of electronic billing and/or payment. We also have a large number of pending patent applications. We own more than 36 domestic and foreign trade and service mark registrations related to products or services and have additional registrations pending.

Employees

     As of June 30, 2004, we employed approximately 3,000 full-time employees, including approximately 530 in research and development, approximately 775 in customer care, approximately 245 in sales and marketing and approximately 1,450 in administration, financial control, corporate services, human resources and other processing and service personnel. We are not a party to any collective bargaining agreement and are not aware of any efforts to unionize our employees. We believe that our relations with our employees are good. We believe our future success and growth will depend in large measure upon our ability to attract and retain qualified management, technical, marketing, business development and sales personnel.

Business Risks

     We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Many of the following important factors discussed below have been discussed in our prior filings with the Securities and Exchange Commission. In addition to the other information in this report, readers should carefully consider that the following important factors, among others, in some cases have affected, and in the future could affect, our actual results and could cause our actual consolidated results of operations for the fiscal year ending June 30, 2005 (and the individual fiscal quarters therein), and beyond, to differ materially from those expressed in any forward-looking statements made by us, or on our behalf.

-13-

Risks Related to Our Business

The market for our electronic commerce services is evolving and may not continue to develop or grow rapidly enough for us to sustain profitability.

     If the number of electronic commerce transactions does not continue to grow or if consumers or businesses do not continue to adopt our services, it could have a material adverse effect on our business, financial condition and results of operations. We believe future growth in the electronic commerce market will be driven by the cost, ease-of-use and quality of products and services offered to consumers and businesses. In order to consistently increase and maintain our profitability, consumers and businesses must continue to adopt our services.

We have not consistently operated profitably in the past and may experience net losses in the future.

     We have not consistently operated profitably to date. Since our inception, our accumulated losses have totaled approximately $1.17 billion. We incurred:

     We experienced operating income of $19.8 million and net income of $10.5 million in fiscal 2004, but we could experience net losses or may not be able to sustain profitability in the future. For the fiscal year ended June 30, 2004, we invested about $66.3 million in research and development and $51.9 million in sales and marketing. We intend to continue to make significant investments in research and development and sales and marketing. If the investment of our capital is not successful to grow our business, it will have a material adverse effect on our business and financial condition, as well as negatively impact an investment in our business and limit our ability to pay dividends in the future to our stockholders.

Our future profitability depends upon our ability to implement our strategy successfully to increase adoption of electronic billing and payment methods.

     Our future profitability will depend, in part, on our ability to implement our strategy successfully to increase adoption of electronic billing and payment methods. Our strategy includes investment of time and money during fiscal 2005 in programs designed to:

     If we do not successfully implement our strategy, revenue growth may be minimal, and expenditures for these programs will not be justified.

     Our investment in these programs will have a negative impact on our short-term profitability. Additionally, our failure to implement these programs successfully or to substantially increase adoption of electronic commerce billing and payment methods by consumers who pay for the services could have a material adverse effect on our business, financial condition and results of operations.

-14-

Competitive pressures we face may have a material adverse effect on us.

     We face significant competition in our each of our business units, Electronic Commerce, Investment Services and Software. Increased competition or other competitive pressures may result in price reductions, reduced margins or loss of business, any of which could have a material adverse effect on our business, financial condition and results of operations. Further, competition will persist, and may increase and intensify in the future.

     In Electronic Commerce, our primary competition remains the traditional paper-based methods of paying and receiving bills. In addition, a number of banks have developed their own internal solutions for all or portions of the electronic bill presentment and payment process. Wells Fargo & Co., Bank One, J.P. Morgan Chase and Wachovia currently have in-house solutions for all or a portion of the integrated services we provide. We do not know whether other banks that currently outsource the bill presentment and payment process to us will decide to construct in-house solutions in the future. Although the banks who decide to use an in-house solution may continue to use our services for some portion of their electronic bill presentment and payment product, we may not provide the same range of services as we currently do and, therefore, we may not receive the same amount of revenue from these banks.

     We also compete directly with Metavante, a division of Marshall and Ilsley Corporation, which currently offers a pay anyone solution to financial service organizations. Over the past several years, Metavante has completed or announced several acquisitions in the electronic bill presentment and payment area, including the purchase of CyberBills, Derivion, Paytrust and Spectrum. We also face potential competition from MasterCard International. We cannot assure you that we will be able to compete effectively against Metavante and MasterCard, or against financial services organizations and billers building their own electronic billing and payment solutions internally, or against other current and future electronic commerce competitors.

     In addition, we cannot assure you that we will be able to compete effectively against current and future competitors in the investment services and software products markets. The markets for our Investment Services and Software products are also highly competitive. In Investment Services, our competition comes from providers of portfolio accounting software and outsourced services and from in-house solutions developed by large financial institutions. In Software, our competition comes from several different market segments, including large diversified computer software and service companies and independent suppliers of software products.

Security and privacy breaches in our electronic transactions may damage customer relations and inhibit our growth.

     Any failures in our security and privacy measures could have a material adverse effect on our business, financial condition and results of operations. We electronically transfer large sums of money and store personal information about consumers, including bank account and credit card information, social security numbers, and merchant account numbers. If we are unable to protect, or consumers perceive that we are unable to protect, the security and privacy of our electronic transactions, our growth and the growth of the electronic commerce market in general could be materially adversely affected. A security or privacy breach may:

     While we believe that we utilize proven applications designed for premium data security and integrity to process electronic transactions, there can be no assurance that our use of these applications will be sufficient to address changing market conditions or the security and privacy concerns of existing and potential subscribers.

-15-

We rely on third parties to distribute our electronic commerce and investment services products, which may not result in widespread adoption.

     In Electronic Commerce, we rely on our contracts with financial services organizations, businesses, billers, Internet portals and other third parties to provide branding for our electronic commerce services and to market our services to their customers. Similarly, in Investment Services, we rely upon financial institutions, including broker dealers, money managers and investment advisors to market investment accounts to consumers and thereby increase portfolios on our APL system. These contracts are an important source of the growth in demand for our electronic commerce and investment service products. If any of these third parties abandons, curtails or insufficiently increases its marketing efforts, it could have a material adverse effect on our business, financial condition and results of operations.

Consolidation in the financial services industry may adversely affect our ability to sell our electronic commerce services, investment services and software.

     Mergers, acquisitions and personnel changes at key financial services organizations have the potential to adversely affect our business, financial condition and results of operations. This consolidation could cause us to lose:

One customer accounts for a significant percentage of our revenue.

     We have one customer, Bank of America that accounts for 19.6% of our total revenue, which reflects their use of products in all three of our business segments. The loss or renegotiation of our contract with Bank of America or a significant decline in the number of transactions we process for them could have a material adverse effect on our business, financial condition and results of operations. No other customer accounts for more than 10% of our total revenue.

If we do not successfully renew or renegotiate our agreements with our customers, our business may suffer.

     Our agreements for electronic commerce services with financial services organizations generally provide for terms of two to five years. Similarly, our agreements with our portfolio management customers are generally long term. If we are not able to renew or renegotiate these agreements on favorable terms as they expire, it could have a material adverse effect on our business, financial condition and results of operations.

     The profitability of our Software Division depends, to a substantial degree, upon our software customers electing to annually renew their maintenance agreements. If a substantial number of our software customers declined to renew these agreements, our revenues and profits in this business segment would be materially adversely affected.

Our future profitability depends on a decrease in the cost of processing payment transactions.

     If we are unable to continue to decrease the cost of processing transactions, our margins could decrease, which could have a material adverse effect on our business, financial condition and results of operations. Many factors contribute to our ability to decrease the cost of processing transactions, including our Sigma quality program, our customer care efficiency program, our processing technology optimization program, and our focus on continually increasing the number of transactions we process electronically. Our electronic rate, or percentage of transactions processed electronically, was more than 71% at the end of fiscal year 2002, more than 75% at the end of fiscal year 2003 and 79% at the end of fiscal year 2004. As a result of the combined effects of programs focused on quality and process improvements, maximizing efficiency, and improving electronic processing rates, our total Electronic Commerce cost per transaction processed decreased more than 24% as of June 30, 2004, as compared to June 30, 2003. Our future profitability will depend, in part, on our ability to continue to decrease this cost.

-16-

The transactions we process expose us to fraud and credit risks.

     Losses resulting from returned transactions, merchant fraud or erroneous transmissions could result in liability to financial services organizations, merchants or subscribers, which could have a material adverse effect on our business, financial condition and results of operations. Although ameliorated by reversibility arrangements with many billers, the electronic and conventional paper-based transactions we process expose us to credit risks. These include risks arising from returned transactions caused by:

     We are also exposed to credit risk from merchant fraud and erroneous transmissions.

We could experience significant losses due to our reliance on agents for walk-in bill payment services.

     Through our contractual relationships with billers, we guarantee consumer payments made at our retail or agent locations regardless of whether an agent makes timely deposits of funds collected. We could suffer significant losses if we are unable to manage and control agents making correct and timely deposits.

We may experience breakdowns in our processing systems that could damage customer relations and expose us to liability.

     We depend heavily on the reliability of our processing systems in both the Electronic Commerce and Investment Services Divisions. A system outage or data loss could have a material adverse effect on our business, financial condition and results of operations. Not only would we suffer damage to our reputation in the event of a system outage or data loss but we may also be liable to third parties. Many of our contractual agreements with financial institutions require the payment of penalties if our systems do not meet certain operating standards. In addition, in our Electronic Commerce Division, we guarantee the delivery of payments and any failure on our part to perform may result in late payments or penalties to third parties on behalf of our subscribers. In our Investment Services Division, a failure of our system could result in incorrect or mistimed stock trades that may result in third party liability. To successfully operate our business, we must be able to protect our processing and other systems from interruption by events that are beyond our control. Events that could cause system interruptions include:

     Although we have taken steps to protect against data loss and system failures, there is still risk that we may lose critical data or experience system failures. Furthermore, our property and business interruption insurance may not be adequate to compensate us for all losses or failures that may occur.

-17-

We may experience software defects and development delays, damaging customer relations, decreasing our potential profitability and exposing us to liability.

     Our products are based on sophisticated software and computing systems that often encounter development delays, and the underlying software may contain undetected errors or defects. Defects in our software products and errors or delays in our processing of electronic transactions could result in:

     In addition, we rely on technologies supplied to us by third parties that may also contain undetected errors or defects that could have a material adverse effect on our business, financial condition and results of operations. Although we attempt to limit our potential liability for warranty claims through disclaimers in our software documentation and limitation-of-liability provisions in our license and customer agreements, we cannot assure you that these measures will be successful in limiting our liability.

We experience seasonal fluctuations in our net sales causing our operating results to fluctuate.

     We have historically experienced seasonal fluctuations in our electronic commerce and software sales, and we expect to experience similar fluctuations in the future, which could cause our stock price to decrease unexpectedly. Our growth in electronic commerce transactions is affected by seasonal factors, such as holiday-based resolutions consumers make to manage finances better, and the fact that most financial institutions traditionally conduct their largest consumer marketing campaigns in the fall months. These seasonal factors may impact our operating results by concentrating consumer acquisition and set-up costs, which may not be immediately offset by revenue increases primarily due to introductory service price discounts. Additionally, online interactive service consumers generally tend to be less active users during the summer months, resulting in lower revenue during this period. Our software sales have historically been affected by calendar year end, our fiscal year end, buying patterns of financial services organizations and our sales compensation structure, which measures sales performance at our June 30 fiscal year end.

If we do not respond to rapid technological change or changes in industry standards, our services could become obsolete and we could lose our customers.

     If competitors introduce new products and services embodying new technologies, or if new industry standards and practices emerge, our existing product and service offerings, proprietary technology and systems may become obsolete. Further, if we fail to adopt or develop new technologies or to adapt our products and services to emerging industry standards, we may lose current and future customers, which could have a material adverse effect on our business, financial condition and results of operations. The electronic commerce industry is changing rapidly. To remain competitive, we must continue to enhance and improve the functionality and features of our products, services and technologies.

We may be unable to protect our intellectual property and technology, permitting competitors to duplicate our products and services.

     Our success and ability to compete depends, in part, upon our proprietary technology, which includes several patents for our electronic billing and payment processing system, our source code information for our software products, and our operating technology. We rely primarily on patent, copyright, trade secret and trademark laws to protect our technology. We also enter into confidentiality and assignment agreements with our employees, consultants and vendors and generally control access to and distribution of our software documentation and other intellectual property. We cannot assure you that these measures will provide the protection that we need.

-18-

     Because our means of protecting our intellectual property rights may not be adequate, it may be possible for a third party to copy, reverse engineer or otherwise obtain and use our technology without authorization. In addition, the laws of some countries in which we sell our products do not protect software and intellectual property rights to the same extent as the laws of the United States. Unauthorized copying, use or reverse engineering of our products could have a material adverse effect on our business, financial condition and results of operations.

     A third party could also claim that our technology infringes its proprietary rights. As the number of software products in our target markets increases and the functionality of these products overlap, we believe that software developers may increasingly face infringement claims. These claims, even if without merit, can be time-consuming and expensive to defend. A third party asserting infringement claims against us in the future may require us to enter into costly royalty arrangements or litigation.

Our business could become subject to increased government regulation, which could make our business more expensive to operate.

     Although our business is currently subject to numerous rules and regulations of governmental entities, it is possible that this regulation may increase or change in the future and such increase or change might make our business more expensive to operate and our products less desirable to use. In particular, due to increased focus by the government on terrorist activities, we may see additional regulation targeted at money laundering or making payments to certain prohibited individuals. In recent years, various governmental entities have become even more interested in further regulating the use and sharing of data and protection of the privacy of this data. It is also possible that new laws and regulations may be enacted with respect to the Internet, including taxation of electronic commerce activities. Because electronic commerce in general, and most of our products and services in particular, are so new, the effect of an increase in regulation or amendment to existing regulation is uncertain and difficult to predict. Any such changes, however, could lead to increased operating costs and reduce the convenience and functionality of our products or services, possibly resulting in reduced market acceptance. It is also possible that new laws and regulations involving the Internet might decrease the growth of consumers using the Internet, which could in turn decrease the demand for our products or services, increase our cost of doing business or could otherwise have a material adverse effect on our business, financial condition and results of operations.

     The Federal Reserve rules provide that we can only access the Federal Reserve’s ACH through a bank. If the Federal Reserve rules were to change to further restrict our access to the ACH or limit our ability to provide ACH transaction processing services, it could have a material adverse effect on our business, financial condition and results of operations.

Our walk-in bill payment business is subject to government regulation and any violation of such regulations could result in civil or criminal penalties or a prohibition against providing money transmitter services in particular jurisdictions.

     We conduct our walk-in bill payment business through APS. In many states in which APS operates, it is licensed as a money transmitter. These licenses require APS to demonstrate and maintain certain levels of net worth and liquidity and also require APS to file periodic reports. In addition to state licensing requirements, APS is subject to regulation in the United States by the federal government, including anti-money laundering regulations and certain restrictions on transactions to or from certain individuals or entities. APS has developed a compliance program to monitor its business for compliance with regulatory requirements and has developed and implemented policies and procedures to monitor all of its transactions in order to comply with federal reporting and recordkeeping requirements. Notwithstanding these efforts, the complexity of these regulations will continue to increase our cost of doing business. In addition, any violations of law may result in civil or criminal penalties against us and our officers or the prohibition against us providing money transmitter services in particular jurisdictions.

-19-

A weak economy could have a materially adverse impact on our business.

     A weak United States economy could have a material adverse impact on our business. In a weak economy, companies may postpone or cancel new software purchases or limit the amount of money they spend on technology and marketing. In the Investment Services Division, growth depends upon individuals and companies continuing to invest in the United States equity markets. To the extent the United States stock markets see a decrease in investment, we may see a decrease in portfolio accounts.

Our quarterly operating results fluctuate and may not accurately predict our future performance.

     Our quarterly results of operations have varied significantly and probably will continue to do so in the future as a result of a variety of factors, many of which are outside our control. These factors include:

     As a result, we believe that period-to-period comparisons of our operating results are not necessarily meaningful, and you should not rely on them as an indication of our future performance. In addition, our operating results in a future quarter or quarters may fall below expectations of securities analysts or investors and, as a result, the price of our common stock may fluctuate.

Our marketing agreement with FDC and our commercial alliance agreement with Microsoft Corporation may limit the flexibility of management.

     The marketing agreement we executed with FDC requires us to purchase payment processing and other products from FDC under specified circumstances, even if our management has other reasons for choosing a different supplier. In addition, our commercial alliance agreement with Microsoft Corporation (“Microsoft”) requires us to develop our products that are used with products made by Microsoft in ways that conform to specified standards. Accordingly, as a result of these arrangements with Microsoft and FDC, both of which were entered into as part of our acquisition of TransPoint, our management’s flexibility to make business decisions may be limited in various respects.

Risks Related to Our Common Stock

Our common stock has been volatile since December 31, 2000.

     Since December 31, 2000, our stock price has been volatile, trading at a high of $58.25 per share and a low of $7.45 per share. The volatility in our stock price has been caused by:

-20-

Availability of significant amounts of our common stock for sale in the future could adversely affect our stock price.

     The availability for future sale of a substantial number of shares of our common stock in the public market or otherwise, or issuance of common stock upon the exercise of stock options or warrants could adversely affect the market price for our common stock. As of August 19, 2004, we had outstanding 90,437,646 shares of our common stock, of which 84,170,929 shares were held by non-affiliates. The holders of the remaining 6,266,717 shares were entitled to resell them only by a registration statement under the Securities Act of 1933 or an applicable exemption from registration. As of August 19, 2004, we also had:

     As of August 19, 2004, the following entities held shares or warrants to purchase shares of our common stock in the following amounts:

     Each of Bank One, Bank of America and the former members of Integrion may be entitled to registration rights. If the former members of Integrion, Bank One or Bank of America, by exercising their registration rights, cause a large number of shares to be registered and sold in the public market, these sales may have an adverse effect on the market price of our common stock.

     In connection with the TransPoint acquisition, we filed a shelf registration statement on behalf of Microsoft, FDC and Citibank that allows continuous resales of the shares that each received as a result of the TransPoint acquisition. Citibank was not restricted in its ability to transfer its shares of our common stock, and we believe it has sold all of the shares that it acquired as a result of this acquisition. Microsoft and FDC were limited in their ability to transfer their shares of our common stock through September 1, 2002, pursuant to stockholder agreements with us. Since September 1, 2002, FDC has sold a significant number of its shares and no longer holds in excess of 5% of our common stock. Microsoft continues to hold its shares of our common stock but as of September 1, 2003, could sell up to the greater of 1% of our average weekly trading volume or 1% of our outstanding common stock in reliance on registration exemptions. In addition, Microsoft and FDC are permitted to a limited extent to engage in hedging transactions with respect to our common stock.

     Sales of substantial amounts of our common stock by any of the parties described above, or the perception that these sales could occur, may adversely affect prevailing market prices for our common stock.

-21-

Anti-takeover provisions in our organizational documents and Delaware law make any change in control more difficult.

     Our certificate of incorporation and by-laws contain provisions that may have the effect of delaying or preventing a change in control, may discourage bids at a premium over the market price of our common stock and may adversely affect the market price of our common stock and the voting and other rights of the holders of our common stock. These provisions include:

     We also have a stockholder rights plan that allows us to issue preferred stock with rights senior to those of our common stock without any further vote or action by our stockholders. The issuance of our preferred stock under the stockholder rights plan could decrease the amount of earnings and assets available for distribution to the holders of our common stock or could adversely affect the rights and powers, including voting rights, of the holders of our common stock. In some circumstances, the issuance of preferred stock could have the effect of decreasing the market price of our common stock.

     We also are subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for five years unless the holder’s acquisition of our stock was approved in advance by our board of directors.

     In addition, both our commercial alliance agreement with Microsoft and our marketing agreement with FDC, each of which we executed in connection with the closing of the TransPoint acquisition, allow the termination of the agreement by Microsoft or FDC, as the case may be, under specific change of control circumstances. If either Microsoft or FDC terminates under these circumstances, we will lose a portion of the future revenue guarantees under the applicable agreement. This potential termination event could discourage third parties from acquiring us.

We are subject to significant influence by some stockholders that may have the effect of delaying or preventing a change in control.

     At August 19, 2004, our directors, executive officers and Microsoft collectively owned approximately 16.4% of the outstanding shares of our common stock. As a result, these stockholders are able to exercise significant influence over matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control.

Available Information

     We make available free of charge on our corporate website, www.checkfreecorp.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission. Our Code of Business Conduct, which is applicable to all of our directors, officers and associates, including our principal executive officer, principal financial officer and principal accounting officer, is also available at the “Corporate Governance” section of the Investor Center page of our corporate website, www.checkfreecorp.com.

-22-

Item 2. Properties.

     We lease the following office facilities:

     We own a 51,000-square-foot conference center in Norcross, Georgia that includes lodging, training, and fitness facilities for our customers and employees. Although we own the building, it is on land that is leased through June 30, 2015. We believe that our facilities are adequate for current and near-term growth and that additional space is available to provide for anticipated growth.

Item 3. Legal Proceedings.

     There are no material legal proceedings pending against us.

Item 4. Submission of Matters to a Vote of Security Holders.

     None.

-23-

Part II

Item 5. Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities.

     Our common stock is traded on the Nasdaq National Market under the symbol “CKFR.” The following table sets forth the high and low sales prices of our common stock for the periods indicated as reported by the Nasdaq National Market.

     On August 19, 2004, the last reported bid price for our common stock on the Nasdaq National Market was $25.97 per share. As of August 19, 2004, there were approximately 1,445 holders of record of our common stock.

     We currently anticipate that all of our future earnings will be retained for the development of our business and do not anticipate paying cash dividends on our common stock for the foreseeable future. In addition, our current credit facility does not allow for the payment of cash dividends on our common stock. Our board of directors will determine future dividend policy based on our results of operations, financial condition, capital requirements and other circumstances. During the last ten years, we have not paid cash dividends.

-24-

Item 6. Selected Financial Data.

     The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”

-25-

(a) During fiscal years 2001 through January 2003, all revenues generated from Bank of America are classified as related party. During fiscal years 2001 through 2004, all revenues generated from Microsoft Corporation and First Data Corporation are classified as related party.

(b) During fiscal years ended June 30, 2004, 2001 and 2000, we recorded charges related to in-process research and development that were capitalized by entities before we acquired them.

(c) During the fiscal year ended June 30, 2002, we recorded an impairment charge related to the goodwill associated with CheckFree i-Solutions and technology assets associated with TransPoint. During fiscal year ended June 30, 2003, we recorded an impairment charge related to other intangible assets and goodwill of CheckFree i-Solutions.

(d) During the fiscal year ended June 30, 2002, we recorded a reorganization charge in order to streamline operations in our Electronic Commerce Division, refine our strategy for the i-Solutions business unit of our Software Division, and discontinue certain product lines associated with our Investment Services Division. For the fiscal year ended June 30, 2003, we adjusted our estimate of the total reorganization charge that was recorded in the previous fiscal year.

(e) In April 2004, we entered into an agreement with BACS, Ltd. to form a joint venture in EBPP, Ltd. located in the United Kingdom, which has incurred losses since inception.

(f) During the fiscal years ended June 30, 2003 and 2001, we recorded losses on certain investments resulting from an other-than-temporary decline in their fair value.

(g) On July 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets.” Upon its adoption, we performed a transitional impairment test and recorded an impairment charge related to the goodwill associated with CheckFree i-Solutions.

The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

-26-

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Overview

     CheckFree was founded in 1981 as an electronic payment processing company and has become a leading provider of financial electronic commerce products and services. Our current business was developed through the expansion of our core electronic payments business and the acquisition of companies operating in similar or complementary businesses.

     We operate our business through three independent but inter-related divisions:

     Through our Electronic Commerce Division, we enable consumers to receive and pay bills. For the year ended June 30, 2004, we processed approximately 583 million payment transactions and delivered approximately 82 million e-bills. For the quarter ended June 30, 2004, we processed nearly 163 million payment transactions and delivered approximately 26 million e-bills. The number of transactions we process each year continues to grow. For the year ended June 30, 2004, growth in the number of transactions processed exceeded 34%. The Electronic Commerce Division accounted for approximately 75% of our annual revenue.

     Through our Investment Services Division, we provide a range of portfolio management services to financial institutions, including broker dealers, money managers and investment advisors. As of June 30, 2004, our clients used the CheckFree APL^SM portfolio accounting system to manage nearly 1.6 million portfolios, representing more than $900 billion in assets. The Investment Services Division accounted for approximately 14% of our annual revenue.

     Through our Software Division, we deliver software, maintenance, support and professional services to large financial service providers and other companies across a range of industries. The Software Division is comprised of three units, each with its own distinct set of software products. The ACH Solutions unit provides software and services that are used to process more than two-thirds of the nation’s nine billion annual Automated Clearing House (“ACH”) payments. The CheckFree Financial and Compliance Solutions (“CFACS”) unit enables organizations to handle their reconciliation and compliance requirements and provides a financial transactions management solution with straight through processing. The i-Solutions unit provides software and services that enable end-to-end electronic billing and electronic statement creation, delivery and payment. The Software Division accounted for approximately 11% of our annual revenue.

Executive Summary

     For the year ended June 30, 2004, we earned net income of $10.5 million. Through continued efforts to improve quality and efficiency throughout the company, we generated $147.8 million of free cash flow, an increase of $14.3 million, or 11% over last year. This free cash flow, combined with cash, cash equivalents, and investments of $400.6 million as of June 30, 2003, allowed us to call our $172.5 million of 6.5% convertible subordinated notes, to acquire HelioGraph, Ltd. (“HelioGraph”) for a purchase price of approximately $18.8 million (approximately $16.3 million net of cash received), and to acquire American Payment Systems, Inc. (“APS”) for a purchase price of approximately $109.0 million (approximately $106.0 million net of cash received), subject to certain post-closing adjustments, in our 2004 fiscal year. In addition, increasingly positive operating results have allowed us to invest heavily in all of our businesses, in order to take full advantage of anticipated growth opportunities. We define free cash flow as net cash provided by operating activities, exclusive of the net change in settlement accounts, less capital expenditures. See “Use of Non-GAAP Financial Information” for further discussion of this measure.

     We continue to experience growth in our Electronic Commerce business. Despite the completion of the previously announced migration of four large banks to in-house billing and payment systems early in fiscal 2004, we generated total transaction growth exceeding 34% on a year-over-year basis. By the end of fiscal 2004, one of the

-27-

four banks signed an exclusive, long-term agreement to return to CheckFree. In the quarter ended December 31, 2003, we announced amended contract terms with our largest customer, Bank of America. The new contract reset the pricing model, and the bank converted to a transaction-based pricing model with volume discounts that are more predictable than in the past. Continued efforts to improve quality and efficiency in our operations, combined with a steadily improving electronic versus paper payment rate and our ability to leverage a significant fixed cost base, have resulted in a lower cost per transaction, offsetting volume-based pricing discounts. Additionally, we delivered almost 82 million e-bills in the year ended June 30, 2004, compared to about 32 million in the previous year. We believe that added availability of e-bills will make electronic payment offerings even more compelling to consumers. Finally, on June 22, 2004, we acquired APS in an effort to penetrate a part of the electronic billing and payment market in which we have not materially participated previously. APS provides agent-based walk-in bill payments to the estimated 20% of U.S. consumers who do not typically rely on bank products and services. We expect this acquisition to generate about 27 million transactions and more than $14.0 million in revenue in the upcoming quarter ending September 30, 2004. The results of our APS operations will be reported in the Payment Services category of our Electronic Commerce Division.

     After two years of slow growth due to stock market conditions, our Investment Services business has begun to see growth in the number of portfolios managed and related revenue. To take advantage of the emerging separately managed accounts market, we are investing heavily to upgrade our technology infrastructure in this business. While near-term investments will reduce our operating margin in this segment over the next year or two, we expect the investments to result in increased penetration and growth in this evolving market in the longer term.

     Despite a solid sales pipeline, customers in our Software Division continue to require an extended evaluation period before purchasing discretionary software applications. While our acquisition of HelioGraph brought us a modest maintenance base and has generated several software sales, revenue growth in our Software business was limited to 4% on a year-over-year basis.

     With the addition of APS for the last eight days of fiscal 2004, we expect substantial revenue growth in fiscal 2005, as we benefit from a full year of APS transactions. While we expect the APS business to result in a modest reduction in our gross margin and our operating margin in the early part of fiscal 2005, as we leverage the technical infrastructure of the business, we expect the margins to return to historical levels by the end of fiscal 2005.

     As part of our acquisition of TransPoint in September 2000, we entered into separate five-year agreements with Microsoft Corporation (“Microsoft”) and First Data Corporation (“FDC”), both of which include monthly minimum revenue guarantees that have increased annually over the term of the agreements. These contracts will expire in fiscal 2006. The following table represents the total annual minimum revenue guarantees throughout the contract period with Microsoft and FDC (in thousands):

     Both of these agreements are currently operating substantially below their minimum levels. If volumes do not grow significantly from both Microsoft and FDC, we expect to see a temporary decline in revenue growth, initially in the second quarter of fiscal 2006. However, we believe we can manage investment levels and improve profitability in our electronic billing business in order to maintain our targeted operating margin in the mid to upper 20% level on a full-year basis. Additionally, we plan to continue to pursue other opportunities for growth, as our recent electronic billing and payment contract signings and the APS acquisition demonstrate.

-28-

     The following table sets forth, as percentages of total revenue, certain consolidated statements of operations data:

Results of Operations

Years Ended June 30, 2004 and 2003

     The following table sets forth total company revenue for the years ended June 30, 2004 and 2003, respectively.

Total Revenue (000’s)

     Total company revenue growth was driven by 12% growth in our Electronic Commerce business, 6% growth in our Investment Services business and 4% growth in our Software business.

     Growth in our Electronic Commerce business continues to be driven primarily by growth in transactions processed from approximately 434 million for the year ended June 30, 2003, to approximately 583 million for the year ended June 30, 2004. Additionally, revenue related to minimum guarantees from Microsoft and FDC increased in total by $9.0 million on a year-over-year basis. We have established pricing models that provide volume-based discounts to share scale efficiencies with our customers. As a result of significant transaction growth, our average revenue per transaction has declined by approximately 14% in our transaction-based revenue. Historically low interest rates throughout fiscal 2004 have also resulted in a dampening of revenue in our interest-sensitive products such as Account Balance Transfer (“ABT”). While our June 22, 2004 acquisition of APS provided only about $1.0 million of revenue in fiscal 2004, we expect that APS will contribute about 27 million electronic transactions and more than $14.0 million of revenue in the first quarter of fiscal 2005.

-29-

     Growth in our Investment Services revenue was driven primarily by growth in the number of portfolios managed, from approximately 1.2 million as of June 30, 2003, to nearly 1.6 million as of June 30, 2004. Economic conditions throughout our fiscal year ended June 30, 2003 resulted in portfolios managed remaining essentially flat at 1.2 million for the year. As the stock market rebound progressed into our 2004 fiscal year, the number of portfolios we managed increased by about 100,000 per quarter. In some cases, new portfolios are being added to our APL system at a lower price point, driven by a mix shift as increased volume comes from broker dealers at a lower price, and by price reductions, where we trade off near-term revenue growth against long-term strategic advantage. As investors move back into equity investments, we expect growth rates of portfolios and revenue to continue.

     Growth in our Software business was driven primarily by our acquisition of HelioGraph in the quarter ended December 31, 2003. While our sales pipeline remains solid, customers continue to take longer to evaluate discretionary software purchases than in prior years.

     Across all segments of our business, for the year ended June 30, 2004, Bank of America generated total revenue of $119.0 million, which exceeds 10% of our total revenue, and remains the only customer that exceeds 10% of our total revenue. Our agreement with Bank of America has a 10-year term, includes annual minimum guarantees of $50.0 million, and provides for tiered pricing which reflects the volume of activity provided by Bank of America.

     The following tables set forth comparative revenues, by type, for the years ended June 30, 2004 and 2003, respectively.

Processing and Servicing Revenue (000’s)

     We earn processing and servicing revenue in both our Electronic Commerce and our Investment Services businesses. While growth in portfolios managed in our Investment Services business contributed nicely, our increase in processing and servicing revenue has come primarily from the aforementioned growth in transactions processed in our Electronic Commerce business. While expected transaction volume diverted from CheckFree to in-house solutions by four large bank customers has dampened our growth during the transition, growth in the remainder of our Electronic Commerce business, including the addition of two large bank customers, has outpaced diverted transactions. We delivered approximately 82 million e-bills in the year ended June 30, 2004, with a price point of approximately $0.20 per e-bill, representing an increase of 156% over the 32 million e-bills delivered during the year ended June 30, 2003. Our commercial agreements with Microsoft and FDC, resulting from our acquisition of TransPoint in September 2000, include monthly minimum revenue guarantees consistent with other consumer service providers. The minimum revenue guarantees from Microsoft and FDC increase annually over the five-year term of the agreements. Volumes from Microsoft and FDC continue to fall substantially below guaranteed levels, but as a result of contractual increases in the minimum revenue guarantee levels, revenue from Microsoft and FDC grew by approximately $9.0 million on a year-over-year basis. Somewhat offsetting this growth has been a reduction in market demand for our ABT products. Finally, contract revisions with Bank of America late in the quarter ended December 31, 2003, along with other volume-based discounts inherent in our business, further reduced our processing and servicing revenue growth.

-30-

License Fee Revenue (000’s)

     Although the software market showed signs of recovery, potential customers continued to extend their evaluation period on discretionary software spending. Therefore, in spite of a strong sales pipeline and the addition of HelioGraph in November 2003, we experienced a slight decline in license revenue on a year-over-year basis.

Maintenance Fee Revenue (000’s)

     Maintenance revenue, which represents annually renewable product support for our software customers, is isolated to our Software business, and tends to grow with incremental license sales from previous periods. Our maintenance base has grown as a result of recent license sales, customer retention rates exceeding 80%, and moderate price increases across all business units, as well as eight months of revenue from the acquisition of HelioGraph. We defer revenue recognition on maintenance billings until cash is collected, which can cause quarter-to-quarter fluctuations. We expect minimal growth in maintenance fee revenue without additional license sales growth.

Other Revenue (000’s)

     Other revenue consists mostly of consulting and implementation fees across all three of our businesses. During our fiscal year ending June 30, 2003, we performed a custom software implementation project that generated a significant amount of consulting revenue that has not recurred in our 2004 fiscal year.

     The following set of tables provides line-by-line expense comparisons with their relative percentages of total company revenue for the years ended June 30, 2004 and 2003, respectively.

Cost of Processing, Servicing and Support (000’s)

     In Electronic Commerce, our electronic payment rate has increased from 75% as of June 30, 2003, to 79% as of June 30, 2004. Electronic payments carry a significantly lower variable cost per unit than paper-based payments and are far less likely to result in a costly customer care claim. In addition to leveraging a significant fixed-cost processing infrastructure, we continue to focus investment on additional efficiency and quality improvements within our customer care processes and our information technology infrastructure to drive cost per transaction improvement.

-31-

Research and Development (000’s)

     Including capitalized development costs of $2.8 million for the year ended June 30, 2004, and $4.3 million for the year ended June 30, 2003, gross expenditures for research and development were $69.1 million, or 11.4% of total revenue, for the year ended June 30, 2004, and were $57.0 million, or 10.3% of total revenue for the year ended June 30, 2003. We continue to invest heavily in product enhancement and productivity improvement initiatives in all of our business segments, and we added moderate levels of research and development spending with the acquisition of HelioGraph.

Sales and Marketing (000’s)

     The decrease in sales and marketing costs, as a percentage of revenue, is due primarily to the fact that the predominance of our revenue growth has taken place in our Electronic Commerce business, which has less associated variable sales commissions. On an absolute dollar basis, we have incurred less general awareness marketing program expense in fiscal 2004 than we had in fiscal 2003. However, these expenses have historically fluctuated due to the nature and timing of various programs.

General and Administrative (000’s)

     The acquisition of HelioGraph in the quarter ended December 31, 2003 added approximately $0.8 million of new quarterly general and administrative costs to our cost base. In the quarter ended March 31, 2004, we accrued approximately $0.5 million of costs associated with a closed facility in the Ann Arbor, Michigan area. We expect our general and administrative costs to continue to run between 7% and 8% of revenue.

Depreciation and Amortization (000’s)

     Depreciation and amortization expense from operating fixed assets and internally capitalized product costs has decreased from $43.3 million for the year ended June 30, 2003, to $41.0 million for the year ended June 31, 2004. The remainder of our depreciation and amortization costs represents acquisition-related amortization. The decrease in non-acquisition-related depreciation and amortization is the result of investments in replacement assets that carry lower costs than the assets they are replacing. The remaining reduction in depreciation and amortization is the result of lower acquisition-related intangible amortization from intangible assets that have fully amortized since last year, and the amortization of lower non-goodwill intangible assets balances resulting from impairment charges in the prior year.

-32-

In-Process Research and Development (000’s)

     In the three month period ended December 31, 2003, we incurred $0.3 million of in-process research and development costs associated with our acquisition of HelioGraph. Please refer to Note 2 in our Consolidated Financial Statements for a further explanation of this charge. There was no charge for in-process research and development associated with our acquisition of APS in June 2004.

Impairment of Intangible Assets (000’s)

     Throughout fiscal 2004, there were no triggering events that caused us to evaluate the recovery of our intangible asset balances. In April 2004, we performed our annual evaluation of intangible asset recoverability and our tests provided no indication of possible impairment. Throughout fiscal 2003, there were no triggering events that caused us to evaluate the recoverability of our intangible asset balances. In April 2003, we performed our annual evaluation of intangible asset recoverability. Our initial tests indicated a potential impairment of goodwill in our i-Solutions reporting unit. Our follow-up tests included a Statement of Financial Accounting Standards (“SFAS”) 86 recoverability test of our technology assets, which indicated no issues, and a SFAS 144 test, which resulted in an impairment of $4.2 million in one of our non-goodwill intangible assets. The final SFAS 142 test resulted in a further impairment of $6.0 million in our i-Solutions goodwill balance for a total charge of $10.2 million.

Reorganization Charge (000’s)

     Due primarily to our inability to sublease office space that was abandoned as a result of a prior reorganization, in the quarter ended June 30, 2003, we recorded $1.4 million of additional reorganization charges to true-up our estimates from the actions we initiated in fiscal 2002.

Equity in the Loss of Joint Venture (000’s)

     In April 2004, we announced a joint venture with BACS, Ltd. in the United Kingdom, designed to create an integrated electronic billing and payment network for billers and banks in the United Kingdom. The equity in the loss of joint venture represents our portion of the loss incurred by the joint venture since its inception.

-33-

Net interest (000’s)

     Despite an increase in average cash and invested assets on a year-over-year basis, interest income has declined as a result of lower average yields.

     Our interest expense decreased significantly on a year-over-year basis. We continued to carry our 6.5% Convertible Subordinated Notes due 2006 at a balance of $172.5 million throughout the year ending June 30, 2003, and through the quarter ended September 30, 2003. We redeemed the notes in full on December 12, 2003. We incurred a cash charge of $4.8 million for a 2.79% call premium to redeem the notes prior to their scheduled maturity date, and we incurred a non-cash charge of $2.4 million to write off the remaining unamortized note issuance costs.

Loss on Investments (000’s)

     The fair market value of one of our investments in a private imaging company remained below our book value for an extended period of time. As a result, we judged this to be an other-than-temporary decline in the market value based on our evaluation of an expected potential recovery of fair value, and, accordingly, in the quarter ended March 31, 2003, we recorded a charge of $1.0 million to reflect the loss. The fair market value of our investment in Payment Data Systems, Inc. (formerly Billserv, Inc.), remained below our book value for an extended period of time. As a result, we judged this to be an “other-than-temporary” decline in the market value based on our evaluation of an expected potential recovery of fair value, and, accordingly, in the quarter ended December 31, 2002, we recorded a charge of $1.9 million. The fair market value of this investment continued to decline subsequent to December 31, 2002, and in the quarter ended March 31, 2003, we recorded an additional charge of $0.3 million.

Income Tax Expense (Benefit) (000’s)

     We turned profitable for the year ended June 30, 2004. However, because our pre-tax income was relatively low for the year, earned tax credits significantly reduced our effective tax rate. As our profits increase and exceed our earned credits in fiscal year 2005, we expect our effective tax rate to approximate the federal and state blended statutory rate of 39%.

-34-

Cumulative Effect of Accounting Change (000’s)

     On July 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible Assets.” SFAS 142 changed the accounting for goodwill and other intangible assets, as goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment by applying a fair-value-based test.

     As a result of the transitional impairment test, under SFAS 142, we determined that goodwill associated with our i-Solutions reporting unit was impaired. We recorded an impairment charge of $2.9 million, net of tax, which is reflected as a cumulative effect of a change in accounting principle in our Consolidated Statement of Operations for the year ended June 30, 2003.

Years Ended June 30, 2003 and 2002

     The following table sets forth total company revenue for the years ended June 30, 2003 and 2002, respectively.

Total Revenue (000’s)

     Total company revenue growth was driven by 15% growth in our Electronic Commerce business, 10% growth in our Software business and 2% growth in our Investment Services business.

     Growth in our Electronic Commerce business was driven primarily by growth in total transactions processed from approximately 316 million for the year ended June 30, 2002, to approximately 434 million for the year ended June 30, 2003. Additionally, revenue related to minimum guarantees from Microsoft and FDC increased in total by $9.0 million on a year-over-year basis. Growth in Electronic Commerce revenue had been dampened somewhat by a decrease in interest rates, which negatively impacted our interest-sensitive offerings, such as our ABT product, by certain of our larger customers transferring payment volume to in-house solutions during fiscal 2003, and by a large customer reaching pricing tier discounts during fiscal 2003 due to significant volume growth.

     Growth in our Investment Services business was dampened by poor stock market conditions. Portfolios managed remained relatively flat, as investors reducing stock holdings offset new portfolio growth. Pricing in Investment Services is primarily based on portfolios managed, and as a result, we experienced less than historical revenue growth in this business.

     Our Software business continued to grow despite our customers extending their software evaluation periods. We experienced relatively strong software license sales in our seasonally high June and December quarters in fiscal 2003, and we were engaged in a significant software services agreement during the year, which combined to provide a boost to Software revenue.

     Across all segments of our business, for the year ended June 30, 2003, Bank of America generated total revenue of $94.3 million, which exceeded 10% of our total revenue, and was the only customer that exceeded 10% of our total revenue.

-35-

     The following tables set forth comparative revenues, by type, for the years ended June 30, 2003 and 2002, respectively.

Processing and Servicing Revenue (000’s)

     As previously mentioned, portfolios managed remained fairly flat year-over-year, and as a result, we saw only modest growth in processing and servicing revenue from our Investment Services business. Growth came primarily from greater transactions processed within our Electronic Commerce business. Additionally, we delivered almost 32 million e-bills in the year ended June 30, 2003, as compared to approximately 11 million e-bills in the previous year. In conjunction with our acquisition of TransPoint in September 2000, we entered into agreements with Microsoft and FDC, both of which include monthly minimum revenue guarantees that increase annually over the five-year term of the agreements. Volumes from Microsoft and FDC continue to fall substantially below guaranteed levels, but as a result of contractual increases in the minimum revenue guarantee levels, revenue from Microsoft and FDC grew by $9.0 million from the year ended June 30, 2002, to the year ended June 30, 2003. Reductions in interest yields from fiscal 2002 had a dampening effect on our interest-sensitive products such as our ABT product, which offset further growth in Electronic Commerce processing and servicing revenue. Furthermore, our largest customer reached cliff-based pricing milestones in the quarters ended December 31, 2002, and June 30, 2003, which reduced our revenue per subscriber for that customer by between 10% and 15%, respectively.

     Three of our larger customers, all of whom were original principals of a consortium known as Spectrum, created and began using in-house payment warehouses for routing electronic bill payment transactions in fiscal 2003. Each of these banks began routing payment transactions to Metavante. A fourth bank customer announced intentions to move its electronic payment processing to an in-house payment solution as well and started processing its own payments late in fiscal 2003.

License Fee Revenue (000’s)

     Potential customers continued to extend their evaluation time on discretionary spending for such things as software products, which resulted in slower-than-normal software license sales during fiscal 2003. As the economy began to turn a bit positive in early calendar 2004, we began to see license sales increase.

Maintenance Fee Revenue (000’s)

     A combination of a decrease in new license sales, customer retention rates of at least 80% across all of our Software business units, and moderate price increases on a year-over-year basis, resulted in a moderately increasing maintenance base.

Other Revenue (000’s)

     Other revenue consists of consulting and implementation fees across all three of our business segments. The primary driver of growth in this area was a consulting services project we were engaged in with a large bank customer within our ACH Solutions business unit in fiscal 2003.

-36-

     The following set of tables provides line-by-line expense comparisons with their relative percentages of total company revenue for the years ended June 30, 2003 and 2002, respectively.

Cost of Processing, Servicing and Support (000’s)

     The most significant factor resulting in the decline in processing and servicing costs, in light of growth in processing and servicing revenue, was platform consolidation in our Electronic Commerce business late in fiscal 2002. For most of fiscal 2002, we maintained three redundant payment-processing platforms. Through December 2001, we were converting Bank of America subscribers from the legacy Bank of America processing platform we purchased in October 2000 and, through March 2002, we maintained the redundant system to close out remaining customer care inquiries and claims, at which time we retired the redundant processing platform. Through this period, we paid Bank of America to run and maintain the platform for us. Once we retired the Bank of America system, we were able to close our customer care facility in San Francisco on April 30, 2002, and our Houston customer care facility in the month ended June 30, 2002. Additionally, as we migrated all but a few CSPs off of our legacy Austin processing platform onto Genesis by the end of June 2002, we closed our Austin office as well. The combination of platform consolidation and office closings eliminated approximately $6.0 million of redundant quarterly processing and servicing costs in the Electronic Commerce business. Additionally, our electronic payment rate improved from approximately 71% for the year ended June 30, 2002, to over 75% for the year ended June 30, 2003. Electronic payments carry a significantly lower variable cost per unit than do paper-based payments and are far less likely to result in a costly customer care claim.

Research and Development (000’s)

     Late in fiscal 2002, we announced a company reorganization that resulted in a reduction in workforce that impacted all our areas, including research and development. The reduction resulted in savings on a year-over-year basis. However, we continued to invest significantly in product enhancement and quality improvement programs in all three of our businesses into fiscal 2003.

Sales and Marketing (000’s)

     During the 2003 fiscal year, we introduced new relationship management and account management positions in our Investment Services business, however, the previously mentioned reorganization, late in fiscal 2002, also impacted sales and marketing expenses, resulting in a year-over-year reduction of costs.

General and Administrative (000’s)

     In addition to reduced rental and related overhead expense from facilities closed late in fiscal 2002 and improved collection experience resulting in favorable bad debt expenses year over year, we continued to carefully manage our corporate expenses, resulting in expected leverage in our overhead costs.

-37-

Depreciation and Amortization (000’s)

     In the beginning of fiscal 2003, we adopted SFAS 142, “Goodwill and Other Intangible Assets.” Upon adoption, goodwill was no longer subject to amortization over its estimated useful life. Instead, goodwill is now subject to at least an annual assessment for possible impairment. We continue to amortize all other intangible assets, such as acquired technology, strategic agreements, tradenames, and the like, over their respective useful lives. As a result of the change, amortization from acquisition-related intangible assets decreased from $394.0 million for the year ended June 30, 2002, to $183.3 million for the year ended June 30, 2003. Underlying depreciation and amortization from operating fixed assets and internally developed product costs increased from $41.6 million for the year ended June 30, 2002, to $43.3 million for the year ended June 30, 2003. The increase in non-acquisition related depreciation and amortization was the result of continued investment in new product innovations and fixed assets necessary to support the continued growth of the company.

Impairment of Intangible Assets (000’s)

     In the quarter ended December 31, 2001, we recorded intangible asset impairment charges totaling $155.1 million. This was the combined result of a charge of $107.4 million for the impairment of goodwill associated with our acquisition of BlueGill Technologies in April 2000 (currently known as CheckFree i-Solutions), and of $47.7 million for the retirement of certain technology assets we acquired from TransPoint in September 2000. In the quarter ended June 30, 2003, we recorded intangible asset impairment charges totaling approximately $10.2 million associated with our annual assessment of the recoverability of goodwill and other intangible asset balances, particularly in our i-Solutions business unit. Upon adoption of SFAS 142 in the quarter ended September 30, 2002, we incurred an additional $2.9 million impairment of intangible assets that is described below in the section titled “Cumulative Effect of Accounting Change,” which is reflected separately in our Consolidated Statement of Operations included in our Consolidated Financial Statements.

     Upon successful integration of BlueGill Technologies into the operations of our Software business, during fiscal 2001, we established a revenue outlook for fiscal 2002 that anticipated continued rapid growth in software license sales. We experienced a drop in demand for electronic billing software during the quarter ended September 30, 2001; however, we did not believe this would impact our longer-term expectations for this product line and, therefore, in our estimation, there was no impairment at that time. When software sales declined again in the quarter ended December 31, 2001, we reevaluated our long-term expectations and viewed this as a triggering event that required evaluation of possible impairment under the guidelines of SFAS 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” Our tests relative to the total tangible and intangible assets related to the i-Solutions product line revealed that the assets were in fact impaired. This resulted in a charge of $107.4 million to write down the value of goodwill related to the acquisition of BlueGill.

     As part of the acquisition of TransPoint in September 2000, we were contractually required to maintain the TransPoint operating technology for up to three years for any customer that wished to remain on the system. When valuing the TransPoint assets, we established an intangible asset for current technology and assigned it a three-year life. By December 31, 2001, we had migrated all of the subscribers, billers and CSPs to our Genesis platform and the last of our international partners gave notice of their intention to cancel their maintenance agreement with us during the December 2001 quarter. Additionally, we had recently concluded that components of the TransPoint technology were not compatible with current or future planned initiatives. We viewed these as triggering events that required the evaluation of possible impairment per SFAS 121. Our overall testing indicated that there was no impairment of the TransPoint assets in general; however, we then evaluated SFAS 121 requirements related to the retirement of assets and identified two technologies for which we had no future use. We retired these two technologies, resulting in a charge of $47.7 million in the quarter ended December 31, 2001.

-38-

     Throughout fiscal 2003, there were no triggering events that caused us to evaluate the recoverability of our intangible asset balance. In April 2003, we performed our annual evaluation of intangible asset recoverability. Our initial tests indicated a potential impairment of goodwill in our i-Solutions reporting unit. Our follow-up tests included an SFAS 86 recoverability test of our technology assets, which indicated no impairment, and a SFAS 144 test, which resulted in an impairment of $4.2 million in one of our non-goodwill intangible assets. The final SFAS 142 test resulted in a further impairment of $6.0 million in our i-Solutions goodwill balance for a total charge of $10.2 million.

Reorganization Charge (000’s)

     In January 2002, we announced plans to close a customer care facility in San Francisco, effective April 30, 2002, which resulted in the termination of employees at that facility. At that time we also announced our intent to eliminate certain of our financial planning products within our Investment Services division, which also resulted in a small reduction of employees in our Raleigh, North Carolina office. On March 19, 2002, we further announced the closing of our Houston and Austin, Texas offices, our Ann Arbor, Michigan office and our Singapore office, combined with a net reduction in force totaling 450 employees. As a result of those actions, we incurred charges totaling $16.4 million consisting primarily of severance and related employee benefits and lease termination fees. We accounted for these actions in accordance with Emerging Issues Task Force (“EITF”) 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” Due primarily to our inability to sublease abandoned office space as originally expected, in the quarter ended June 30, 2003, we recorded $1.4 million of additional reorganization charges to true-up our estimates from the actions we initiated in fiscal 2002.

Net interest (000’s)

     An increase in invested balances of cash, short-term and long-term investments from 2002 to 2003 was offset by reduced yields from lower interest rates during fiscal 2003, resulting in a drop in interest income. The increase in interest expense was due primarily to an increase in long-term lease obligations during fiscal 2003. Anchored by the fixed rate on our $172.5 million of outstanding convertible debt, average interest rates on our debt remained stable for us over these periods.

-39-

Loss on Investments (000’s)

     The fair market value of one of our investments in a private imaging company remained below our book value for an extended period of time. As a result, we judged this to be an “other-than-temporary” decline in the market value based on our evaluation of an expected potential recovery of fair value, and, accordingly, in the quarter ended March 31, 2003, we recorded a charge of $1.0 million to reflect the loss. The fair market value of our investment in Payment Data Systems, Inc. (formerly Billserv, Inc.), remained below our book value for an extended period of time. As a result, we judged this to be an “other than temporary” decline in the market value based on our evaluation of an expected potential recovery of fair value, and, accordingly, in the quarter ended December 31, 2002, we recorded a charge of $1.9 million. The fair market value of this investment continued to decline subsequent to December 31, 2002, and in the quarter ended March 31, 2003, we recorded an additional charge of $0.3 million.

Income Tax Benefit (000’s)

     Our June 30, 2002, pre-tax income included the impact of non-deductible goodwill amortization expense. With our adoption of SFAS 142 in July 2002, we stopped amortizing goodwill. Our resulting effective tax rate in fiscal 2003 became more in line with a blended statutory rate of about 40%, with the exception of federal and state tax credits that have more than offset other non-deductible expense.

Cumulative Effect of Accounting Change.

     Please refer to the “Years Ended June 30, 2004 and 2003” section above for an explanation of the cumulative effect of accounting change.

-40-

Segment Information

     We evaluate the performance of our segments based on revenues and operating income (loss) of the respective segments. Segment operating income (loss) excludes acquisition-related intangible asset amortization, in-process research and development, and significant one-time charges related to various business and asset acquisitions. The following table sets forth revenue, operating income (loss) and certain other financial information by segment, for the periods noted:

-41-

Years Ended June 30, 2004 and 2003

     Electronic Commerce Segment Information:

     Revenue growth in Electronic Commerce is primarily the result of an increase in transactions processed, the addition of two large bank customers, an increase in e-bills distributed, and tiered TransPoint-related revenue minimums, offset by contractual volume-based price discounts, four bank customers transferring transaction volume to in-house systems, and dampened demand for our ABT product offering.

     We offer two basic levels of electronic billing and payment services to our customers – a “Full Service” offering and a “Payment Services” offering. Customers that use our Full Service offering generally outsource their electronic billing and payment process to us. A Full Service customer may or may not use a CheckFree-hosted user interface, but uses a broad array of services, including payment processing, payment warehouse, claims processing, e-bill, online proof of payment, various levels of customer care, and other aspects of our service. Also, while a Full Service customer may have its own payment warehouse, we maintain a customer record and payment history within our payment warehouse to support the Full Service customer’s servicing needs. Customers in the Full Service category may contract to pay us either on a per-subscriber basis, a per-transaction basis, or a blend of both. The distinction between Full Service and Payment Services is based solely on the types of service the customer receives, not on our pricing methodology. Customers that utilize our Payment Services offering receive a limited subset of our electronic billing and payment services, primarily remittance processing. Additionally, within Payment Services, we provide services to billers for electronic bill delivery, biller direct hosting and payments, as well as other payment services, such as account balance transfer. A third category of revenue we simply refer to as Other Electronic Commerce includes our Health and Fitness business and other ancillary revenue sources, such as consumer service provider and biller implementation and consulting services.

     The following tables provide a historical trend of revenue, underlying transaction metrics and subscriber metrics, where appropriate, for our Electronic Commerce business over fiscal 2004 and fiscal 2003:

Fiscal 2004: